EUR/USD Forecast to Weaken as US-Europe Interest Rate Outlook Diverges

The EUR/USD exchange rate is expected to weaken due to diverging interest rate policies between the US and Europe, potentially dropping to 1.0400. This could impact global markets and trade, with technical analysis suggesting further downside potential.

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Salman Khan
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EUR/USD Forecast to Weaken as US-Europe Interest Rate Outlook Diverges

EUR/USD Forecast to Weaken as US-Europe Interest Rate Outlook Diverges

The EUR/USD exchange rate is expected to weaken in the coming months due to a diverging outlook on interest rates between the United States and Europe, according to analysts at Commerzbank. The US Federal Reserve is likely to keep interest rates higher for longer compared to the European Central Bank, which is expected to cut rates in June.

Commerzbank analysts predict the EUR/USD could potentially drop to 1.0400, with a break below the April 16 low of 1.0601 signaling the start of a deeper decline. The US economy's strength, stubbornly high inflation, and robust job market are reasons for the Fed to maintain its current interest rate level of 5.25-5.50%. In contrast, Europe has seen stronger disinflation and weaker economic activity, leading to more unified ECB policymakers advocating for a rate cut.

Why this matters: The diverging monetary policies between the US and Europe could have significant implications for global financial markets and international trade. A weaker Euro against the US dollar may impact the competitiveness of European exports and the profitability of US companies operating in Europe.

Technical analysis also suggests the EUR/USD could see further downside potential, with support levels at 1.0503 and 1.0446. The pair is currently consolidating after a significant downtrend, forming a potential base for a reversal. However, traders should consider ongoing and upcoming economic events in both the US and Europe, as they can significantly impact the pair's movement.

The EUR/USD exchange rate is influenced by economic policies, interest rates, and economic data from both the Eurozone and the United States. "The EUR/USD pair has been trading sideways around 1.0650 to start the new week, with a lack of directional momentum in the absence of high-tier data releases," according to the article. The risk sentiment could impact the US dollar's valuation and drive the pair's action in the near term.

Key Takeaways

  • EUR/USD expected to weaken due to diverging US-EU interest rates
  • Commerzbank predicts EUR/USD could drop to 1.0400 on Fed-ECB policy gap
  • Weaker Euro may impact EU exports, US companies in Europe
  • Technical analysis suggests further downside potential for EUR/USD
  • EUR/USD movement influenced by economic data, risk sentiment